Shining a light on the shadow economy

In focus

Written by

Brian McEnery

In focus

Written by

Brian McEnery

Managing the shadow economy requires action at all levels, including embracing it as a possible source of innovation and growth, says ACCA president Brian McEnery

This article was first published in the September 2017 China edition of Accounting and Business magazine.

A recent ACCA report has drawn attention to the shadow economy – that is, goods and services paid for in cash and deliberately concealed from public authorities (in particular, the taxman). The report estimates that by 2025 the shadow economy will account for an average of 21% of global GDP, a fall from the 23% of 2011.

A remarkably large proportion of economic activity remains concealed, and that brings with it a number of practical and ethical issues. It falls to us as professional accountants to observe, report and manage those issues.

While governments end up with a smaller tax take, at the coalface of the untaxed and unlawful economy, workers are at risk from unregulated conditions. But it is also true that some evolving businesses and business models find the traditional economy not fit for purpose, and are consequently forced into the shadows: the sharing economy is one that springs to mind.

There is a very interesting role for professional accountants to play here. In an ideal world, we would be dealing only with customers and clients who operate entirely within the limits of the legally defined economy. In practice, though, the situation is often not so black and white, and part of our role is to monitor developments in business, business models, rules and regulations, and help to shape the developments that ensure businesses are sufficiently well informed and motivated to operate within these constraints.

The report, which covers 28 countries all over the world, has some useful recommendations for accountants. While the shadow economy presents a minefield of risk – not least reputational – it offers opportunities for accountants to help clients in transitioning from informal to formal status.

Some of the ways that we can start to deal with the shadow economies around the world include developing robust country-specific guidance and procedures, developing mechanisms for handling the interface between businesses in the formal and shadow economies, working together with policymakers and labour market experts, and developing education offerings and ideas on the topic.

It is fantastic to see our professional insights team shining some light on the shadows with this paper. The more we open up the discussion, the more we can be aware of the status quo and its risks and nuances – and move on towards solutions.

Brian McEnery is a partner specialising in corporate restructuring and healthcare consulting at BDO in Ireland